3Q Earnings Weaker, As Predicted - Analyst Blog

By: Zacks.com

Posted: 10/19/2012 10:21:00 AM

Referenced Stocks: GE;GOOG;INTC;MSFT

The revenue miss from
General Electric
(
GE
) this morning and
Google
(
GOOG
) yesterday spotlight a trend we have been seeing repeatedly this
earnings season. Companies are finding it difficult to achieve
revenue gains and the trend is widespread, with even the
Technology sector not immune.

This dour state of the corporate earnings picture will likely
be the dominant theme of today's trading action, even if the
September Existing Home sales data coming out a little later adds
further to the improving sentiment on the housing sector.

Here is the (almost) real-time scorecard of the reporting season
as of Friday morning, October 19th. With results from 114
companies in the S&P 500 or 22.8% of the index's total
membership, in hand, total earnings are down 2.8% from the same
period last year, with 55.3% of the companies beating earnings
expectations. Total revenues are up 1.3% from the same period
last year, but only 34.2% of the companies are coming ahead of
revenue expectations.

With these 114 companies accounting for 34.1% of total S&P
500 quarterly earnings, we have a decent enough sample size to
draw conclusions from. And the bottom line conclusion is that the
earnings picture does not look very inspiring. We knew that third
quarter earnings will be weak as expectations had fallen quite a
bit ahead of the start of the reporting season. But it seems like
everybody was (kind of) hoping that the actual results would be
better. But they are not. At least, not yet.

When even reliable performers like Google,
Microsoft
(
MSFT
) and
Intel
(
INTC
) can't grow their earnings, then you know that we have a serious
growth problem. But lack of growth aside, positive surprises are
also at their lowest level in a while.

Of the companies that have already reported results, only 55.3%
have beat earnings expectations. In the second quarter of 2012,
which was by no means strong either, we had 65.8% of these same
companies come out with positive earnings surprises, while the
'beat ratio' for these same companies has averaged 70.6% over the
last four quarters. The 34.2% 'beat ratio' on the revenue side
compares to 37.7% for the same group of companies in the second
quarter.

Guidance for the current quarter and beyond is also on the
tentative side, which puts current expectations for the fourth
quarter and beyond. I have been of the view that consensus
expectations of a turnaround in earnings in the fourth quarter
and beyond were overly optimistic. I am getting more convinced of
that view given how the third quarter reporting season has
progressed thus far.